California Bill Aims To Expand Debt Collection Protections To Commercial Debts

On September 24, 2024, Governor Gavin Newsom signed into law California Senate Bill 1286 (“SB 1286”).  SB 1286 will extend existing consumer debt collection protections in California to small businesses and to the collection activities of business debt.  In particular, SB 1286 is designed to expand existing prohibitions against debt collectors under the Rosenthal Fair Debt Collection Practices Act (“RFDCPA”) and, with SB 1286’s enactment, debt collectors will now also be prohibited from engaging in unfair or deceptive acts or practices when collecting covered commercial debts.

What has been the state of affairs leading up to these amendments?

The RFDCPA currently prohibits debt collectors in California from engaging in unfair or deceptive acts or practices in debt collection, with “debt collection” defined as any act or practice in connection with the collection of consumer debts and “consumer debt” covering money, property or their equivalent, due or owing, or alleged to be due or owing, from a natural person by reason of a consumer credit transaction.  The law prohibits acts designed to intimidate or harass debtors, such as threatening violence or actions that the debt collector will not take, contacting a debtor’s acquaintances or employers about the debtor’s debt and using obscene language.  The law also prohibits false representations, unfair practices and the improper use of judicial proceedings.

The RFDCPA includes provisions and requirements that are similar to those of the federal Fair Debt Collection Practices Act (“FDCPA”), but contrary to the FDCPA and several state debt collection legal regimes, the RFDCPA applies to a person collecting their own debts in their own name in addition to a person collecting debts on another person’s behalf or collecting their own debts under a different name.  Additionally, the RFDCPA requires a debt collector to provide specific disclosures in attempting to collect a time-barred debt.

How will California Senate Bill 1286 change the current state of affairs in California?

SB 1286 expands the scope of the RFDCPA to prohibit debt collectors from engaging in unfair or deceptive acts or practices in the collection of covered commercial debts, in addition to consumer debts, thus impacting providers of small business financing who service and collect their own debts.  Specifically, while the current version of the RFDCPA applies to “consumer credit” and “consumer debt”, SB 1286 expands the RFDCPA to further apply to “covered commercial credit” and “covered commercial debt”.  These terms include money or property due or owing, or alleged to be due or owing, from a natural person to a lender, a commercial financing provider or a debt buyer pursuant to a covered commercial credit transaction.

What is a “covered commercial credit transaction”?

The term “covered commercial credit transaction” means a credit transaction of $500,000 or less primarily for purposes other than personal, family or household purposes.  This definition broadly covers sales-based financing transactions, finance leases and traditional loans.  SB 1286 further defines “debtor” to include guarantors of covered commercial credit transactions.

Additionally, SB 1286 expands the definition of delinquent debt to cover commercial debt.  Existing law currently defines “delinquent debt” as a consumer debt, other than a mortgage debt, and requires that for all delinquent debt sold or assigned on or after July 1, 2022, the debt collector to which such delinquent debt has been assigned must provide the debtor with a statement providing that the debtor may request records showing:

(1) that the debt collector has the right to seek collection of the debt;

(2) the debt balance, including an explanation of any interest charges and additional fees;

(3) the date the debt became delinquent or the date of the last payment;

(4) the name of the creditor and the account number associated with the debt;

(5) the name and last known address of the debtor as it appeared in the creditors’ records prior to assignment of the debt; and

(6) the names of all persons or entities other than the debt collector to which the debt has been assigned.

The statement must also provide that the debtor may request a copy of the contract or other document evidencing the debtor’s agreement to the debt.  SB 1286 would broaden the definition of delinquent debt to mean a covered debt (i.e., a consumer debt or a covered commercial debt), other than a mortgage debt, and would specify that these provisions apply to all delinquent covered commercial debt sold or assigned on or after July 1, 2025.

What are the penalties for violations by the lender and remedies available to harmed commercial borrowers?

The remedies available for a violation under the RFDCPA are the same as those of the FDCPA, and the debtor is allowed to assert his/her own private right of action.  The RFDCPA further provides statutory damages ranging from $100 to $1,000 per violation.

Perhaps most concerning is that SB 1286 makes unfair or deceptive debt collection practices with regard to covered commercial debt a crime in California.  The RFDCPA makes it a crime for a debt collector, creditor or attorney to send communications attempting to collect a consumer debt that simulates judicial process or that gives the false appearance of being authorized by a governmental agency or attorney.  Existing law also requires a debt collector to stop collecting a consumer debt when a debtor provides certain information, such as the debtor being an alleged victim of identity theft.  SB 1286 expands these provisions to make it a crime to engage in such acts in collecting either a consumer debt or a covered commercial debt.

What exemptions are available?

The provisions of SB 1286 related to covered commercial credit and covered commercial debt only apply to covered commercial credit or covered commercial debt entered into, renewed, sold, or assigned on or after July 1, 2025.

Furthermore, SB 1286 generally applies only to debtors who are “natural persons”. Therefore, commercial credit transactions that do not involve a borrower or guarantor that is a natural person generally remain exempt under the RFDCPA.  An exception to this is that a debtor is not limited to being a “natural person” under the RFDCPA if a debtor is a victim of identity theft and notifies a debt collector that they are a victim of identity theft.  In such a case, the RFDCPA requires the debt collector to stop debt collection activities.

SB 1286 also exempts aggregate commercial debt where the total amount of all covered commercial credit transactions due and owing by the debtor or other person obligated under the transactions to the same lender or commercial financing provider is more than $500,000.

Must a lender engaging in the collection of covered commercial credit or debt obtain new licensure?

SB 1286 specifies that, with respect to the collection of covered commercial debt or covered commercial credit, the RFDCPA does not impose any additional licensing requirement on debt collectors.

What does the California Senate Bill 1286 mean for you if you are a commercial lender in California?

The broad definition of “covered commercial credit transaction” under SB 1286 means that commercial lenders in California or servicing California clients may need to comply with certain debt collection obligations if any business or person owes money and the amount financed or leased was $500,000 or less.  Additionally, it is important to know that, unlike most state debt collection laws, the RFDCPA applies to a person or entity collecting its own debt in its own name.

Where is the California Senate Bill 1286 at in the process of becoming law?

SB 1286 was enacted into law on September 24, 2024.  SB 1286 will take effect on January 1, 2025.

What does this mean for commercial lenders?

Before January 1, 2025, commercial lenders should review their current collection operations and existing policies and procedures to ensure compliance with SB 1286.

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